SYDNEY -- Global money managers and companies are rushing to meet a deadline to report on their carbon footprint, but the lack of a standard metric raises concerns their efforts could just be a box-ticking exercise in the transition from brown to green.
From 2020, firms with some $118 trillion of funds under management - among 800 signatories to a United Nations pact - will make climate-risk related disclosures as an early step towards making the world a better place by 2030.
The problem with assessing carbon footprints is that there are no universal criteria for benchmarking environmental, social and governance (ESG) - the key factors in measuring the sustainability and ethical impact of an investment.
“The way you quantify climate impact and consider transition risks could differ from company to company,” said Stephane Andre, a Sydney-based portfolio manager at Alphinity Investments which has A$8.2 billion ($5.65 billion) in assets under management.
“There is no prescriptive way to look at it,” he added. “What it means is in the short term there might be limited value in it.”
That hasn’t stopped stakeholders such as Andre from piling pressure on companies to tackle the 17 United Nations ‘sustainable development goals’ such as zero hunger, gender equality and clean energy.
Mining titan BHP Billiton surprised markets this year when it announced plans to cut carbon emissions not just at its own facilities but for its customers as well. It exited some coal projects, on the heels of rival Rio Tinto.
Large banks have begun disclosing their carbon exposures while setting targets for clean lending, while insurers including Chubb and Suncorp, have moved away from coverage for new coal projects.
Top U.S. retailer Walmart said this month it would stop selling ammunition for handguns in all its stores across the country and Australia’s Woolworths became the first supermarket chain in the world to issue a certified climate bond this year.
Despite a blitz of such corporate announcements, fund managers are constantly trying to differentiate between genuine ESG and spin by looking for deeper disclosures from the companies they screen, in areas such as gender pay gap and relationship with employees and suppliers.
But not all companies publish data on ESG impact yet, and analyzing data from those that do is also challenging. “Data isn’t always readily available, and not all investors have access to advanced analytical tools or various ESG data sets,” said Jessica Huang, head of Americas and APAC platform for Blackrock Sustainable Investing. “Investors often rely too much on historical data, which may not provide an accurate prediction of future trends.”
Some investment managers use so-called ESG ratings provided by firms such as Fitch Ratings.
One MSCI study found that companies with higher average ESG ratings had lower risks, greater profitability and higher dividend yields. Yet, those ESG scores are based on the levels of disclosure by a company, not an actual assessment of practices.
Worryingly, a comparison of FTSE and MSCI ESG scores has hardly any correlation, said Mike Lubrano, managing director for corporate governance & sustainability at Cartica Management.
Variations in the components and weightings of the underlying metrics used by different index providers also generate widely divergent scores, he noted.
Despite the challenges of measuring ESG performance, investments in the stream are rising. Investors believe that if companies do well on ESG metrics, such focus will make their businesses more sustainable in the long term.
Indeed, an analysis of the top 500 companies in Asia, based on ESG metrics, shows their average returns outperformed the broader MSCI Asia Pacific index each time in the last 10 years.
Data from Lipper showed assets under management of ethical, water and alternative energy funds in Asia climbed 16% to $28.5 billion in the first half of 2019 from a year ago.
In debt markets, climate bond issuances surpassed $150 billion this year though still a far cry from the $1 trillion goal for 2020, according to Climate Bonds Initiative.
The increased momentum has meant that banks are engaging more actively with their corporate clients while shareholders are rallying behind green groups demanding companies cut emissions, lift governance and improve social responsibilities.
So called responsible investors also shun industries that negatively affect society, including companies that produce or invest in alcohol, tobacco, gambling and guns.
Such activism prompted Australian supermarket giant Woolworths to finally agree, after years of engagement with investors, to offload its profitable pub and liquor business in July.
“Poker machines are horrible things but they are very profitable,” said Bruce Smith, another portfolio manager at Alphinity. “Once they get rid of that business, Woolworths will become a possible investment for us.”
Woolworths did not specifically comment on its decision, saying only that the move would help it simplify its structure and focus on the retail business.